Citi's Buiter On Plan Z: Unleash The Helicopter Money

All is (once again) failing. What to do? Much more of the same of course. Only this time whip out the nuclear option: the Helicopter Money Drop. This is the logical next step that Citigroup's Willen Buiter sees as "Central Banks should also engage in 'helicopter money drops' to stimulate effective demand" - temporary tax cuts, increases in transfer payments, or boosts to exhaustive public spending - all financed directly by the willing central bank accomplice in the monetization gambit. In his words: "This will always be effective if it is implemented on a sufficient scale." It is not difficult to implement, would likely be politically popular (nom, nom, nom, more iPads), and in his mind need not become inflationary. He does come down to earth a little though from this likely-endgame scenario noting that "helicopter money is not [however] a solution to fiscal unsustainability." It is just a means of providing a temporary fiscal stimulus without adding to the stock of interest-bearing, redeemable public debt. Any attempt to permanently finance even rather small (permanent) general government deficits (as a share of GDP) by creating additional base money would soon – once inflation expectations adjust to this extreme fiscal dominance regime - give rise to unacceptably high rates of inflation and even hyperinflation. His estimate of the size of this one-off helicopter drop - beyond which these inflation fears may appear - is around 2% of GDP - hardly the stuff of Keynes-/Koo-ian wet dreams. The fact that this is being discussed as a possibility (and was likely always the end-game) by a somewhat mainstream economist should be shocking as perhaps this surreality is nearer than many would like to imagine.

Citigroup's Willen Buiter: Helicopter Money

In cooperation with the fiscal authorities, the central bank can engage in helicopter money drops, as described by Milton Friedman (1969, p. 4). This is a temporary tax cut, increase in transfer payments or boost to exhaustive public spending (including infrastructure investment), financed through a permanent increase in the monetary base. This will always be effective if it is implemented on a sufficient scale. Consider the thought experiment where the Chancellor of the Exchequer sends a £1000 cheque to every man, woman and child in the UK and funds this by borrowing from the Bank of England, which monetises the debt and commits not to reverse this ever. Now consider the following negative economic environment: the British public has become Teutonic in its attitudes towards thrift or caution and decides to save the entire windfall. The solution is simple. Repeat the exercise with a £10,000 cheque for one and all and keep going adding zeros until the consumer cries uncle and starts spending. Ben Bernanke (2002), citing Milton Friedman’s original helicopter money drop parable, listed helicopter money drops (aka money-financed tax cuts) as one of the options open to the monetary authorities at the zero lower bound – as any well-informed monetary economist would have done. He was riled with the epithet “Helicopter Ben” as a result, and has not discussed the merits of the proposal since then, unfortunately.

...It may well be the most effective form of stimulus currently, in particular if directed towards public investment which has taken the brunt of public spending cuts in those countries that have begun fiscal consolidation in earnest (i.e. not the federal government of US or Japan). If the helicopter money were at the pure discretion of the central bank (it could simply say ‘no’), it need not imply weaker incentives for governments to manage their own finances prudently.

...A helicopter money drop is not difficult to implement. It would most likely be politically popular. It just requires cooperation between the central bank and the Treasury. In the US and the UK, helicopter money may in fact turn out to be the true face of the QE we are supposed to have seen these past years. If the asset purchases and monetisation are not reversed at some point in the future, QE will turn out to have been helicopter money after all, if either it brought down government borrowing rates in the primary and secondary markets or if it just provided a subsidy to government funding in the primary markets. Unless the central bank makes a credible non-reversal commitment today, however, the asset purchases and monetisation may be interpreted as temporary – as QE - and their effectiveness therefore less than would have been the case had it been recognised for what it is (or may be) – helicopter money.

Helicopter money, even in huge amounts, need not become inflationary ever. The increase in the government deficit associated with the fiscal stimulus is temporary because the fiscal stimulus is temporary. The associated increase in the size of the central bank’s balance sheet may be large, but it is finite. As long as the current quasi-liquidity trap, high leverage for sovereigns, banks and households endure, much of the money transferred to households (should they be the primary beneficiaries of the helicopter money drop) could well be saved by households, to be deposited in banks who add it to their excess reserves. Should consumers get their confidence back and decide to spend the part of the helicopter money drops they initially saved, fiscal tightening is the solution. Should banks get their confidence back and decide to push their excess liquidity towards the private sector by offering loans on irresistible terms, any inflationary increase impact of the enlarged stock of base money on the stock of bank credit or broad money can be neutralised either by raising bank reserve requirements, or by raising the remuneration rate on excess reserves held by banks with the central bank to levels that would induce banks to keep their money at the central bank rather than lend it out to the private sector.In Japan and in the euro area, central bank independence tends to be interpreted by the central banks as not answering the telephone when the fiscal authorities call. Such a rejection of cooperation between monetary and fiscal authorities and of coordination between monetary and fiscal policies reflects an elementary but damaging misunderstanding of the meaning of independence, in our opinion. If an escape from this self-imposed state of impotence is deemed to require an amendment of the Bank of Japan Law and of the European Treaties, then we would encourage it. We actually believe that the European Treaties, including Article 123, permit the funding of sovereigns by the ECB and the national central banks in the secondary sovereign debt markets. That’s good enough to make helicopter money drops feasible even in Euroland. In any case, good monetary and fiscal policy should not be blocked or inhibited by a blanket or even a partial prohibition of the monetisation of public debt and deficits. If done properly, and subject to the consent of the monetary authority, a monetary authority which we can presume to take its price stability mandate seriously, it would not cause inflation. Instead, we think it would help prevent inflation falling below the level deemed consistent with price stability in the medium term, or even deflation, and the risk of recession or even depression.

Finally, helicopter money is not a solution to fiscal unsustainability. It is just a means of providing a temporary fiscal stimulus without adding to the stock of interest-bearing, redeemable public debt. Any attempt to permanently finance even rather small (permanent) general government deficits (as a share of GDP) by creating additional base money would soon – once inflation expectations adjust to this extreme fiscal dominance regime - give rise to unacceptably high rates of inflation and even hyperinflation. Our estimates of the maximum general government deficit for the euro area and the US that can be financed without a surging rate of inflation are around 2% of GDP at most – hardly the stuff of which permanent monetisation dreams are made. Although unanticipated inflation can reduce and, at the extreme, wipe out the real NPV of servicing a given stock of domestic currency debt, once inflation becomes embedded in expectations, the ability to extract additional real resources through the anticipated inflation tax is very limited.

Gully Foul, just because an episode of Duck Tales had some indigenous people go money crazy over Scrooge's bottle caps doesn't mean that real life will work that way. Don't you remember the moral of that one? He dumped a plane load of bottle caps on them and devalued the currency. Nobody wants bottle caps except maybe you and people who just figured out how to make a wheel.

Money is what the people say is money, there is no stopping the return of precious metals as currency and anyone not paying attention is missing the opportunity to enter the next paradigm very well off.

I'm sure you're right, Gully, gold will never be valuable again! That and ammo and food. Those will never be valuable either. I'd better liquidate now while I still can! Thank you for opening my eyes, sir! ZH I'm outta here, you people are nutz!

Yup...and pensions into ashes nearly instantly. Nobody can move the interest rate because if they do their debt obligations eat them alive. So the helicopter drops the money bomb...zimbamwe time.

Alternatively market drops like a stone and margin bubbles pop all the way back to 1978 and pension values are reduced to the investment values.

Damned if you do, damned if you don't. At this point bull or bear, completely fucked binary sum game situation. Either option results in the destruction of value because of more worthless capital by proxy every credit market as well.

The number of Federal Housing Administration-insured home loans entering foreclosure jumped in March after half the mortgages it modified to ease repayment terms were in default again a year or more later. [...]

Borrowers with mortgages for homes bought in 2010, the FHA’s peak lending year, now owe almost 7 percent more than their homes are worth if they used the minimum down payment, according to S&P/Case-Shiller home price index data. [...]

Lenders initiated foreclosures on 36,400 FHA-backed mortgages, twice the number in April 2011, according to Lender Processing Services. The increase for Fannie Mae and Freddie Mac loans was 13 percent.

They tried to give money to corporations and it didn't work out. The next step is to give money to people to stimulate the demand.

This will not work as well. The money will go into consumer products which are made in China. It will be straight pass through to Chinese. I am sure the goverment of China is already sending their lobbyist to Washington DC to support this idea.

Demand is dead for other reasons that economists like Krugman or politicians just cannot understand.

But the Chinese will then take that money and buy UST. Basically, this plan lets citizens replace the Primary Dealers in the QE model. Which would you rather have, an iPad, or what you get when the Fed does QE and the bankers get bonuses?

Plus, it helps get Obama re-elected, and it gives people choices on what trinkets they will buy. win-win-win! Except the stimulus cards will have to be run through Goldman Sachs, Bank of America, et al to ensure they get their slice of the pie, or it wouldn't be fair!

Except for the obvious trolls (HammyWanger, MillionDollarBlowJob, DrBendOver) there are a great group of people here on ZH; some really imaginative, intellegent people and I don't have to read more than 2 or 3 articles to laugh my gut out.

On a serious note, this is my nightly prayer, 'Just 1 more year' - 'cus I feel it deep in my bones that some serious shit is coming.

And my wife is either going to have me committed to a mental hospital, or, OR, she'll have me sainted for building one of the best prepped Arks 2nd only to Noah's.

Sounds like he is throwing his hat in the ring to be next Fed Chief. Also, sounds like the kind of noises a 63 year old would spew as he would rather not see the world end and his favorite golf courses close..

Three years ago my Cigna plan paid 100% for almost everything. Two years ago that changed to 90%. One year ago it was 80%. Now it is 80% with a 2500 deductible. Seriously, WTF? I have four children and a wife with major medical problems, so I'll take what I can get. To the government: eff you for messing with my insurance company to raise their costs, which of course raised mine. /rude

Then the council's secretary N.P. Colwell helped plan (and some say write) the famous 1910 report by Abraham Flexner. Flexner, the owner of a bankrupt prep school, had the good fortune to have a brother, Simon, who was director of the Rockefeller Institute for Medical Research. At his brother's suggestion, Abraham Flexner was hired by the Rockefeller-allied Carnegie Foundation so that the report would not be seen as a Rockefeller initiative. And Carnegie, whose main goal was to "rationalize" higher education, that is, replace religion with science, saw the AMA cartelization drive as useful. Claiming to have investigated nearly every school in the country, Flexner rated them on suitability. Schools he praised received lush grants from the Rockefeller and associated foundations, and almost all the medical schools he condemned were shut down, especially the "commercial" institutions. AMA-dominated state medical boards ruled that in order to practice medicine, a doctor had to graduate from an approved school. Post-Flexner, a school could not be approved if it taught alternative therapies, didn't restrict the number of students, or made profits based on student fees.

Why the opposition to for-profit schools? If an institution were supported by student fees rather than philanthropic donations, it could be independent of the foundations. The Rockefeller family had invested heavily in allopathic drug companies and wanted doctors to use their products.

Actually, I think the proposed solution with the helicopter money is to put more money into circulation without increasing the total amount of debt. We'll grow (code for "inflate") our way out of this crisis!

If they're going to go full retard... Take the average debt load per household and send every household a check for that amount... on one condition, that those households that are in a net deficit position must use the windfall to pay down / pay off the debt. At least this way the prudent are not rElatively punished.

Too much to print, and not a big enough helicopter either. The FED just wires around money that hasn't even been created yet, to their buddies. Maybe we should all get dual citizenship like Michele Bachmann.

It is always wise to take advice from someone who works for an instiutution which four years after the blow-up and after having received several hundreds of billions in bailouts and Fed giveaways and while still on the Fed gravy traini remains the only major TBTF unable to pass the easiest stress test ever divised just three months ago.

In your thought experiement there were no restrictions on how the Peoples Bailout could be spent. A rule that first funds had to be used to repay debt, and the rest, on a debit card, has to be spent in a certain time period would fix that. No savings allowed.

"the British public has become Teutonic in its attitudes towards thrift or caution and decides to save the entire windfall."

Or you issue the money with a negative interest rate on it; you have a card with $1000, but after one week, whatever is left on that card loses 10 percent. repeat each week until the card has $0 on it.

OK, so now we know why they've been smacking down Gold and Silver non-stop for the past 2 months. When the Gold price goes back to $1900/oz the day after they announce this plan, they can say "it's not a big deal".

My brother in law is the Director of Finance at Microsoft. The state is in the process of tolling the 520 bridge across Lake Washington. Do you think he gives a shit at the "skyrocketing" cost of travelling in to Seattle?

does he like purple prose? I could sell him my book! Microsoft...has two names..micro and soft...My book is macro and hard! It has to be its about the Crusades! But sometimes opposites attract. You kno...Marilyn and Arthur Hitman...So who knows life is full of surprises. I'm not a microsoft man but I'd love to sell a 'chef d'oeuvre' to one of them, all tongue and no cheek! Like Einstoned dead!

Helicopter drop of 2% of GDP? That's $300 billion. The market would guffaw at that. The US Government pisses away more in two months. This is the most timid "Helicopter Drop" that I've heard since 2008. This guy is practically a sound money advocate.

Helicopter or refurbished B52 fleets. The money returns directly to the banks, and we are where we were. The private and household debt levels are too high, and money handed out does not help any more.

Already said here in different forms: every dollar more is a lesser dollar all round. Numerical dollar growth is not real growth. Hark Hear the roters roar.

What these guys never address is that all that public investment goes to Asia in the form of product and the middle east for energy. The nature of the US economy is such that everything bleeds out. When Friedman and co theorized these ideas these economies actually made products and citizens bought them. I'm not saying the whole thing isn't conceptually flawed, but they don't even recognize this obvious fact.

Buying gold is so uncivilised and barbaric. The only people that buy gold do it for tradition or are repressed Jews in 1939 that sow it into there garments some have it put in there teeth but that's about it,

Civilised people throw fiat money out of choppers that is real progression

In fact as the world implodes due to trillions of printed fiat currency the best thing is to liquidate all you gold and buy 30 year T.Bonds at real adjusted coupon rate of -5% .

US will never be Weimar. Why? We're not German. Anglo society has always veered toward austerity and frugality in the face of economic hardship. History is a better indicator in this case than anything else

IF..... I say IF ZeroHedge was as accurate as it likes to portray itself, and not the tree clubhouse for gold whoring, instead of showing a helicopter dropping money there would be a caricature of Bernanke putting money into a vacuum tube going directly to broker/dealers.

No need to fear Helicopter Ben if you live in New York, because the bloomburgler bought up an entire arsenal of anti-aircraft equipment after 9/11 , we got helicopters with sidewinders and gatling guns mounted up here in the big apple.... no way in hell a "helicopter ben attack" would ever get through.